We specialise in shareholder disputes and claims against companies. If you are having problems with your business partners, please get in touch with our team here.
I have a dispute with my other shareholder. What are my options?
When the honeymoon is over...
Starting a new business and company is exciting, but what happens if you and your co-owners are no longer on the same page?
I often get approached by people who are ‘handbags at five paces’ with their business partner or partners. The common causes of a breakdown in a company are that one party is no longer pulling their weight. Or they may be taking an unfair slice of the cake. Or they are running the place as if it is their own without consulting the others.
Or perhaps they are just being plain unreasonable. And it is no wonder. It is often said that business partnerships are the most difficult. It’s like being married, but without the sex from time to time to release the tension.
So, when someone arrives in my office squabbling over a business, this is the advice I give.
Do you have a shareholders’ agreement?
The first thing I ask is “Do you have a shareholders’ agreement?” This is a written agreement setting out the rule book for the business. It is often prepared by a lawyer, but it could be an exchange of emails or a written document you all agreed to.
If there is such an agreement, then I will want to read this first to see if it contains the answer.
A well written shareholders’ agreement will usually say that in the event of a dispute, the parties will try and work it out over a couple of weeks. If this doesn’t work, then a mediation should be convened.
This sounds like a lot of fuss and bother, but mediation is actually a really effective way of sorting things out. For example, there is one mediator that I work with who has a 99% success rate. If we all get in a room for a day, then most times the whole thing can be sorted out, and a whole lot of costs and tears avoided.
The shareholders’ agreement will then likely say that if the mediation doesn’t work, "we are off to arbitration". An arbitration is just a private court hearing. The sorts of people we use to act as arbitrators are retired High Court judges, like Paul Heath KC or Raynor Asher. They were excellent Justices of the High Court and are very good at resolving commercial disputes.
Arbitration is faster and cheaper than going to court. You might reasonably expect to have a hearing and the whole matter resolved within six to 12 months.
If there is no shareholders’ agreement
If you don’t have a shareholders’ agreement, then the next step is to look at the rules in the Companies Act 1993 (the Act). The Company may also have a constitution which was adopted when the company was first set up. A constitution is a more expanded version of the rules set out in the Act, with a few amendments. You can work out whether you have a constitution by searching for the company on the Companies Register (companies-register.companiesoffice.govt.nz) and clicking on the documents tab.
As a general rule, a shareholder is able to “control” the company if they hold more than 75% of the shares. This allows them to make major decisions about the future of the company.
But more often than not, the people who arrive in my office are equal shareholders or hold less than 75% of the shares. In that case, we look at whether there are grounds for bringing an application under s174 of the Act. This is called a prejudiced shareholder application.
Prejudiced shareholder application
Section 174 of the Act says that if one shareholder feels the other shareholders are being mean to them, then they can apply to the High Court. (Well, this is rough paraphrasing. The test is actually whether “the affairs of the company are being conducted in a manner that is likely to be oppressive, discriminatory or unfair” to you.) The Judge then has wide discretion as to what to do. The Judge can order the other shareholder to buy your shares, or for the business to be sold and the proceeds divided.
The threshold for passing the test is not very high, and the Court is inclined to step in and help get things sorted out.
We usually kick things off by writing to the other shareholder(s) on your behalf saying “you’re not being very nice to Joe anymore. It looks like it’s time to end this business relationship. How about we get someone independent to value the shares and you buy Joe out. If you don’t agree to do that, then we will bring a prejudiced shareholder application and get the Judge to force you to do it. We will then ask the court to make you pay our legal costs. So how about you sort this out like a grown up and avoid all sorts of hassle”.
Sometimes the letter is enough. But more often it is the start of the process. Your business partner probably has hurt feelings as well and will see the cause of the problem as being you. So typically, we agree to head off to mediation, and go through the process set out above.
If mediation doesn’t work, then we are off to court. The courts are log jammed, so it may take 12-18 months before there is a hearing. However, in our experience, you should start the process and get into the queue at the court as soon as possible. Once there is a date with a Judge looming, this gives everybody the impetus to get on and get it sorted. Over 90% of these disputes settle before they get to court.
If there is no shareholders’ agreement
If you don’t have a shareholders’ agreement, then the next step is to look at the rules in the Companies Act 1993 (the Act). The Company may also have a constitution which was adopted when the company was first set up. A constitution is a more expanded version of the rules set out in the Act, with a few amendments. You can work out whether you have a constitution by searching for the company on the Companies Register (companies-register.companiesoffice.govt.nz) and clicking on the documents tab.
As a general rule, a shareholder is able to “control” the company if they hold more than 75% of the shares. This allows them to make major decisions about the future of the company.
But more often than not, the people who arrive in my office are equal shareholders or hold less than 75% of the shares. In that case, we look at whether there are grounds for bringing an application under s174 of the Act. This is called a prejudiced shareholder application.
Prejudiced shareholder application
Section 174 of the Act says that if one shareholder feels the other shareholders are being mean to them, then they can apply to the High Court. (Well, this is rough paraphrasing. The test is actually whether “the affairs of the company are being conducted in a manner that is likely to be oppressive, discriminatory or unfair” to you.) The Judge then has wide discretion as to what to do. The Judge can order the other shareholder to buy your shares, or for the business to be sold and the proceeds divided.
The threshold for passing the test is not very high, and the Court is inclined to step in and help get things sorted out.
We usually kick things off by writing to the other shareholder(s) on your behalf saying “you’re not being very nice to Joe anymore. It looks like it’s time to end this business relationship. How about we get someone independent to value the shares and you buy Joe out. If you don’t agree to do that, then we will bring a prejudiced shareholder application and get the Judge to force you to do it. We will then ask the court to make you pay our legal costs. So how about you sort this out like a grown up and avoid all sorts of hassle”.
Sometimes the letter is enough. But more often it is the start of the process. Your business partner probably has hurt feelings as well and will see the cause of the problem as being you. So typically, we agree to head off to mediation, and go through the process set out above.
If mediation doesn’t work, then we are off to court. The courts are log jammed, so it may take 12-18 months before there is a hearing. However, in our experience, you should start the process and get into the queue at the court as soon as possible. Once there is a date with a Judge looming, this gives everybody the impetus to get on and get it sorted. Over 90% of these disputes settle before they get to court.
Some other tricks we use…
There are a few other tricks in the bag:
Stack the board: If you hold more than 50% of the shares in the company, you can appoint and remove directors. The directors (the “board”) make most day-to-day decisions for the company. If you control who is on the board, you control the company’s direction.
Appoint an alternate director: Does the company have a constitution that lets you appoint an ‘alternate director’? An alternate director acts sort of like your attorney, and can turn up at meetings on your behalf. It can be helpful to have somebody else step into your shoes and advocate at directors’ meetings where you are stuck, are being pushed around or the personalities aren’t working.
Make demand for repayment of the current account: If you have put money into the business, or haven’t drawn out all of the profit, then likely you will have a current account (where the company owes you money). If that is the case, we can issue a notice under the Act demanding that the company make payment within 10 working days or we will put the company into liquidation. Sounds like the nuclear option - but believe me it is very effective in getting your business partners to focus very quickly on the issues!
Appoint a receiver under a GSA: If you are owed money by the company, then you may have already registered a security interest (known as a General Security Agreement). This is akin to registering a mortgage over the company. And when you have a mortgage, you can effect a “company mortgagee sale”.
Is there a restraint of trade?
One other thing I will explore with you is whether you are subject to a restraint of trade. A restraint is an agreement not to work in competition with the business for a certain period of time after you leave the business. This could trip you up on the way out.
When I raise the subject of restraints with clients, I always get the same response “I thought restraints of trade were not enforceable…?”
Well, that depends. Do you have an employment agreement? Restraints in an employment agreement have to be reasonable, to balance the seniority of the position against the right of an individual to earn a living.So, restraints of trade in employment agreements are able to be challenged in the Employment Court. The court recognises that the employment relationship is not always an equal playing field, and employees will sometimes sign agreements containing unreasonable restraints just to get a job.
However, the court is usually less flexible around restraints of trade for a business relationship. If the restraint is contained in a shareholders’ agreement, then it’s more likely to be found that the parties to the agreement were on a level playing field when they negotiated the agreement. And so, the court will uphold the restraint. If this is the case, we may need to negotiate a variation to the restraint as part of the exit.
How much does it cost
I’m not going to lie to you. These disputes can be expensive. And you will spend money really fast.
Writing the initial letter and getting a response is likely to set you back around $5,000. Getting an independent valuer in to work out what the shares are worth is likely to cost another $5,000 or more.
Heading off to a mediation and spending a day around a table thrashing out a deal – you can easily chew up $10-000 to $20,000, plus another $5,000 for your share of the mediator’s costs.
Still squabbling after mediation? Then start selling the family jewelry, you are going to spend another $80-$100,000 going to court. Eek.
The best thing to do?
A “dear John” letter to your business partner from a lawyer may be enough to get them to pull their head in and sort it out. If not, mediation is typically highly successful.
I strongly recommend getting this process underway quickly. I’ve personally been involved in a partnership dispute. I know what it is like to wake up in the middle of the night thinking about how unreasonable the other side is being and worrying about how you are going to resolve everything. Well, imagine waking up tomorrow, and the problems you currently face have all been sorted out. It’s a great feeling.
So, the best thing to do? Just start the process.
Gerard Molloy, of our office, has considerable experience in dealing with shareholder disputes and claims against companies. If you are having issues with your business partners, he would be happy to review the circumstances and give you an opinion as to the best course of action.
